Joseph Krist

Publisher

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CALIFORNIA BUDGET

Governor Gavin Newsome released his 2022-23 state budget proposal — a $286.4 billion budget plan. The budget projects the state will collect a $45.7 billion general fund surplus in the next year, of which $20.6 billion is discretionary. The plan is being called “The California Blueprint”.  The Budget reflects $34.6 billion in budgetary reserves. These reserves include: $20.9 billion in the Proposition 2 Budget Stabilization Account (Rainy Day Fund) for fiscal emergencies; $9.7 billion in the Public School System Stabilization Account; $900 million in the Safety Net Reserve; and $3.1 billion in the state’s operating reserve. The Rainy Day Fund is now at its constitutional maximum (10 % of General Fund revenues) requiring $2.4 billion to be dedicated for infrastructure investments in 2022-23.

The Budget accelerates the paydown of state retirement liabilities as required by Proposition 2, with $3.9 billion in additional payments in 2022-23 and nearly $8.4 billion projected to be paid over the next three years. And in spite of all of this, the Budget projects the State Appropriations Limit or “Gann Limit” will likely be exceeded in the 2020-21 and 2021-22 fiscal years. Any funds above this limit are constitutionally required to be allocated evenly between schools and a tax refund. The Budget includes total funding of $119 billion for K-12 education. K-12 per-pupil funding totals $15,261 Proposition 98 General Fund—its highest level ever—and $20,855 per pupil when accounting for all funding sources.

The surplus allows the State to restore business tax credits, including research and development credits and net operating losses that were limited during the COVID-19 Recession, and proposes an additional $250 million per year for three years for qualified companies headquartered in California that are investing in research to mitigate climate change. The Budget also allocates $3 billion General Fund over the next two years to reduce the Unemployment Insurance Trust Fund debt owed to the federal government.

The plan also reflects the substantial infusion of federal funding to the State under the Infrastructure Investment and Jobs Act. California is estimated to receive almost $40 billion of formula-based transportation funding for the following programs over the next five years: Existing surface transportation, safety, and highway performance apportioned programs. A new bridge replacement, rehabilitation, preservation, protection, and construction program. A new program that will support the expansion of an electric vehicle (EV) charging network. A new program to advance transportation infrastructure solutions that reduce greenhouse gas emissions.  A new program to help states improve resiliency of transportation infrastructure.  Improving public transportation options across the state, with increased formula funding for transit.

The “Blueprint” is not without controversy. The Budget includes an additional $9.1 billion ($4.9 billion General Fund and $4.2 billion Proposition 1A bond funds) to continue to fund the construction of the State’s high speed rail line. It also includes funding to make California the first state to realize the goal of universal access to health coverage for all Californians by closing a key gap in preventative coverage for individuals ages 26 to 49, regardless of immigration status.

The Blueprint does highlight potential threats to the State’s fiscal position. The COVID-19 Pandemic remains a risk to the forecast. Strong stock market performance has generated a significant increase of volatile capital gains revenue that is approaching its prior peak levels (as a share of the state’s economy) in 2000 and 2007. A stock market reversal could lead to a substantial decrease in revenues.

WATER NOT EVERYWHERE

The first few days of 2022 have generated very mixed news on the water supply crisis in the American West. The U.S. Bureau of Reclamation announced that it plans to adjust management protocols for the Colorado River in early 2022. The plan is to reduce monthly releases from Lake Powell in an effort to keep the reservoir from dropping further below 2021’s historic lows.  this past November was the second-driest on record and inflows came up 1.5 million acre-feet short of the Bureau’s projections from the previous month. 

The current level of the reservoir leaves available water at 27% of capacity. That is a drop of 164 feet from what constitutes full capacity.  Worse, it is just 11 feet above the bureau’s target of a 35-foot buffer before it enters into a zone where the generation of hydropower by water flowing through the Glen Canyon Dam becomes unreliable.

In contrast, the year-end snow and rain storms in California set records for snow in the Sierra watershed and began contributing to increased flows and storage at previously drought impacted facilities.  Lake Oroville, the northern California dam and hydroelectric facility has seen all the extremes of climate impacts over the recent five years. It has gone from effectively overflowing resulting in damage to hydro facilities. More recently, hydro generation was suspended due to the low level of water available in the lake for five months.

The Northern Sierra and Trinity Mountains currently have 128% of their normal snow levels for Jan. 11. That has generated enough water to raise Lake Oroville’s level by 89 feet. That is enough water to meet release obligations to agricultural customers and create enough flow to allow limited hydroelectric generation. Initially, one of three turbines will operate with the other two pending continued increased water levels. When the Lake is full, it provides about 1% of California’s peak statewide electricity demand. As of 9 a.m. Tuesday, the lake was at 730.08 feet and 42% of its total capacity. 

PUERTO RICO

As we go to press, the Financial Oversight Board faced a 1/4/22 deadline to file the latest iteration of the modified Plan of Adjustment in Puerto Rico’s ongoing Title III proceedings. In issuing her latest orders in the case, Judge Swain indicated that a resolution to the proceedings may occur with the next 4-6 weeks. She issued decisions upholding the board’s interpretation of Act 53, the locally enacted debt and pension law associated with the Plan of Adjustment. Act 53 has language saying there will be no cuts to pensions. The Oversight Board has contended that it’s plans to freeze accruals of pension benefits and eliminate cost of living adjustments is necessary to allow the Commonwealth to balance its budgets.

The judge ruled that Act 53 language clearly only bars modifications of the monthly benefit amount, to which board has agreed. It splits the baby in that it slows but does not reverse the impact of pensions on the Commonwealth budget. The other major legal issue overhanging the process is the continuing litigation against the constitutionality of PROMESA which is being brought by two individual bondholders. They object to the use of what are effectively bankruptcy proceedings under law and procedures which do not apply to states versus territories. There had been some thought that Judge Swain might await the outcome of those challenges to the underlying law before approving a Plan of Adjustment.

The judge had prior ruled on the issue of PROMESA legality in its favor as part of the Title III proceedings. The U.S. DOJ is charged with defending the law and it does not intend for proceedings on that litigation until the first week in February. It does not appear that Judge Swain will wait for that issue to be decided.

Regardless of how the proceedings are ultimately solved it is hard to not see this whole mess as a gigantic lost opportunity. The Commonwealth government continues to undermine long-term confidence through its policies and actions. It has continued to be an impediment to a solution. The legislature continues to move in a populist manner denying reality about its short-term economic realities and its true potential.

The actions in regard to pensions reflect the continued stubbornness on the part of the political establishment as the process unfolds. It raises the issue of whether sustained sound financial operations can continue in the absence of outside supervision and/or oversight. Whenever the issue is raised, all sorts of culturally based objections are raised with the citizenship of residents always cited. If the Commonwealth truly wanted to address this concern, the Title III action certainly provided an opportunity for reform. 

NEW JERSEY TRANSIT

This week I had occasion to use subway and commuter train service in the NY Metro area for the first time since the onset of the pandemic. The train line was operated by NJ Transit and ended at a newly remodeled station operated by the NY MTA. It was a reminder of the complexity of financing the region’s mass transit resulting from the number of different entities involved in their provision. For NJ Transit, that funding comes from the New Jersey Transportation Trust Fund Authority (“TTFA”).

The Authority issues Transportation Program Bonds secured under a legal structure that requires annual legislative appropriation of contract payments for TTFA debt service. The legislature could fail to appropriate even though the source of revenues (the Transportation Trust Fund) cannot be used for anything else if not first appropriated for debt service. There would not be much motivation to fail to appropriate. The State secures between 90 and 95% of its state level debt through appropriation mechanisms so non-appropriation is simply self-destructive. In the case of the transit bonds even more so given the essentiality of TTFA-financed projects, the dedication of revenue to transportation and the importance of maintaining market access.

This week, Moody’s raised its outlook on the Authority’s Baa1 rating on outstanding Transportation Program Bonds to positive. In the end, the rating remains tied to that of the State’s GO rating currently at A3. That relationship will remain as bondholders do not have a direct lien on dedicated revenue, and there are no remedies in the event of non-appropriation.

MUNICIPAL SOLAR

The City of Manchester, NH has put into operation the largest solar generation facility in the state to be developed by a municipality. Covering 12 acres at the site, the solar array — the largest municipal array in the state — is expected to offset more than 2,700 metric tons of CO2 per year — equivalent to avoiding the emissions from the burning of 3 million pounds of coal to generate electricity. It is built on the site of a former landfill. This helps to mitigate concerns over aesthetics and siting. It offers an example of how municipal assets – especially stranded assets like landfills and brownfield sites – can be transitioned to environmental uses.

It is a small scale private public partnership. In this case, the design, development, and operation of the project is being undertaken by a private entity. The City was able to provide a site and facilitate approval. Manchester estimates that it is poised to receive energy savings and tax revenue estimated at more than $500,000 over 20 years at no cost to the city.

THE GREEN DEBATE BEGINS

There are signs that 2022 may be the time for the “green” investment market to settle on criteria to objectively answer the question, How Green Is My Investment? The municipal market is beginning to see the use of “green verifiers”, private third parties who offer to “certify” the “greenness” of a given security. At the same time, the analyst community is in the midst of their process of establishing recommended standards and disclosure metrics for use by the municipal market. The issue of disclosure is also tied to the existence of standards.

For much of the green investment boom, it can be argued that Europe has moved ahead of the U.S. in its process of green investing. That process is far from complete by the ongoing effort by the European Commission to develop a “taxonomy” to be used to classify what counts as sustainable investment. The document is not officially released but press accounts claim that nuclear and natural gas generation will be treated positively in the final document.

If that plan were attempted to be adopted in the U.S., the inclusion of natural gas and/or nuclear generation in any plan to address carbon-based climate change would be controversial at best. And that will be the central issue for the municipal utility sector. The entire range of possible approaches are already being followed by municipal utilities.

Some are better positioned than others in terms of their fossil fuel generation. Some are clearly looking at natural gas as a bridge fuel to the post fossil fuel world. Others are going the nuclear route. For some, renewables are more or less feasible than others. There are those utilities which stand to lose some significant segment of supply regardless of the process.

ENERGY, EMPOLYMENT, AND THE ECONOMY

The current debate over the Build Back Better legislation drags on. As the process unfolds, West Virginia Senator Manchin has emerged as everyone’s favorite bogeyman as the effort to legislate significant climate mitigation legislation continues. For many, the process of dealing with climate change seems straightforward. After all, who wouldn’t want to save the planet? Well, if you are employed in the energy industry and the push for renewables continues the question is being asked by workers in that industry in places like West Virginia is what is in it for me economically?

A recent report from a consortium of groups seeking to advance nuclear as a carbon free option sheds light on the economic realities facing workers and policymakers as the debate over the future of generation unfolds. The data does provide fuel for those arguing that renewable energy will not provide the thousands of good paying jobs to offset employment declines associated with reduced fossil fuel use. The data helps show why there is a high level of skepticism

Ohio had the highest number of coal electric power generation workers at the end of 2019 but shed 25 percent of its coal generation workforce—just over 4,000 jobs—between 2016 and 2019.

The median hourly wage for all energy workers in the U.S. is $25.60, 34 percent higher than the national median hourly wage of $19.14. The overall hourly wage for energy jobs is also 95 percent and 120 percent higher compared to the retail and accommodation and food service industries, respectively.

Utility and mining and extraction workers have the highest absolute hourly wages of all industry segments. Utility employees receive a median hourly wage of $41.08—115 % above the national median wage of $19.14 and 10 percent higher than the overall median wage for all utility workers, which is $37.50. At $27.19 per hour, electric power generation workers earn a premium that is 42 % higher than the national median wage of $19.14; this technology sector represents almost 11 percent of all energy jobs.

The nuclear, electric power transmission and distribution, natural gas, and coal industries support the highest wage premiums compared to the national median. These four energy industries support hourly wages that are at least 50 percent higher than the national median hourly wage of $19.14. The nuclear industry in particular supports a high hourly wage; at $39.19, these jobs earn 105 percent more than the national median but account for less than one percent of total energy jobs.

Electric power transmission and distribution jobs comprise about one in ten energy jobs and support hourly wages of $31.80—66 percent above the national median—while natural gas and coal workers earn a respective 59 and 50 percent above the national median (see Table 6). Natural gas jobs represent 7.6 percent of total energy employment while coal jobs account for 2.2 percent of all energy jobs.

Nuclear and coal generation have the highest median hourly wages; these sectors support wages that are a respective 115 and 80 % above the geographically weighted wages. Natural gas electric power generation jobs also support significantly higher wages, with a 77 % wage premium. Solar, oil, and wind electric power generation employees earn wage premiums that are approximately 20 to 35 % above national wages, but below that for gas.

WHILE ENVIRONMENTAL REGULATION CLOSES COAL PLANTS

The U.S. Environmental Protection Agency on Tuesday proposed denying requests from three Midwest coal-fired power plants to continue dumping coal ash in unlined surface impoundments, a move that could lead to the plants’ early retirements. Under a rule finalized in mid-2020, the EPA allowed utilities to continue dumping coal ash from their power plants into unlined basins until April 11, 2021.

Some 57 requests to extend the deadline have been made. Four of those requests have been deemed to be incomplete or inadequate. Two of those four are owned by municipal utilities. City, Water, Light, and Power’s 200-MW Dallman plant in Springfield, Illinois; and, Lansing Board of Water and Light’s 160-MW Erickson plant in Lansing, Michigan. This process is just the beginning of EPA efforts to address issues like coal ash storage and disposal, nuclear operations, and water quality issues related to all fossil fueled generation facilities.

In Michigan the municipal utility in Grand Haven is confronting the realities of coal and reclamation. The Michigan Department of Environment, Great Lakes and Energy (EGLE) and the Grand Haven Board of Light & Power disagree on how to dispose of coal ash and chemical residues left over after the closure of a coal fired generation plant. The issue is how to handle accumulated ash which now sits in ponds. Depending upon the age of a coal ash pond and the material which lines it, serious environmental issues can result. These require significant expenses to clean up.

It is a repeat of many other situations involving waste ponds especially those associated with generation facilities. The EPA has applied a greatly heightened level of attention to these conditions as it was a point of emphasis in the home state of the current EPA administrator. It is not surprising to see heightened state regulatory attention as a result.

LOUISIANA UPGRADE

The last year saw a bit of everything in the Sportsman’s Paradise in 2021 – hurricanes, floods, tornados, a declining oil and gas business, and continued diminished tourism to New Orleans. With all of these issues potentially raising significant obstacles to economic recovery from the pandemic, one might not have put Louisiana at the top of the potential upgrade list.

Nevertheless, the State of Louisiana’s general obligation ratings (Aa3) from Moody’s were assigned a positive outlook. Moody’s cited “the significant progress the state has made restoring its financial reserves and liquidity in recent years by aligning revenue and spending with its smaller oil and gas sector, rebuilding borrowable funds and generating budgetary surpluses in consecutive years.

Moody’s did acknowledge one commonly held concern. “The state’s recovery, however, depends in part on the economic recovery of New Orleans (A2 stable), the state’s largest city and a popular tourism destination.” The current revival of COVID creates a real timing risk for New Orleans with Mardi Gras less than a month away. This just highlights the vulnerability of tourism-based economies so long as the pandemic remains a significant public health issue.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.